"Correct" interest rate

Discussion in 'Tax' started by ssmith3023, Dec 24, 2014.

  1. ssmith3023

    ssmith3023 Guest

    W is Grantor of Irrevocable Trust with H as beneficiary. So Trust income reported on their joint tax return. Trust set up a Single Member LLC (SMLLC) with the trust as the only member. So the SMLLC is a disregarded entity and any income still reported on the joint tax return - so far so good. The LLC is making a home-equity loan to the H&W. So mortgage interest will be paid by H&W to trust. I am pretty sure that since the SMLLC and the H&W are the same tax entity - there is neither mortgage interest income (to SMLLC) or a mortgage interest deduction (to the H&W) - since they are paying this to themselves. So far so good.

    But what is the "correct" interest rate? I know there is something called the Applicable Federal Rate interest rate. Is that applicable here? Also I believe this AFR is a minimum rate? Can the actual rate charged by the LLC be higher? Again - no matter the rate I don't believe it would result in interest income or interest expense.
     
    ssmith3023, Dec 24, 2014
    #1
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  2. You say, "So trust income is reported on their joint return." That
    does not necessarily follow. Is it because it's a grantor trust?
    Or that the trust distributes all its income to H? Or for some
    other reason?
    Why in the world would you want to do that?
    Why in the world would you want to do that?
    Right, in theory.
    A minimum interest rate is required to be charged on loans, and the
    IRS recalculates the rate every month. But (assuming you are
    correct that they are just paying themselves) that shouldn't apply
    because there is no interest income or interest deduction.
    Yes, the rate can be higher, if allowed under local law.

    The problem is to understand why you are doing this. If this
    transaction is seen by the IRS to somehow distort your income or
    evade taxes, they may want to recalculate your income and taxes in
    a way they think more accurately reflects the reality of your
    situation.
     
    Stuart A. Bronstein, Dec 24, 2014
    #2
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